DISCLAIMER: This content is provided for informational purposes only and is not intended as legal, accounting, tax, HR, or other professional advice. You are responsible for your own compliance with laws and regulations. You should contact your attorney or other relevant advisor for advice specific to your circumstances.
Inventory is the backbone of your restaurant.
Your food inventory plan keeps everything in place, organized, and connected. Just one tiny inventory oversight or misstep can result in a drastic impact on your restaurant costs and profitability.
Today's volatile environment makes it all the more important for restaurant to optimize their inventory management and take control of costs. Rocketing food costs and ongoing labor struggles are pushing up restaurant prime costs. Operators have to pull every lever they have to track and control costs — optimized restaurant inventory management is a critical lever.
Keep reading to dive into restaurant inventory management 101. See what inventory management is and why it's important for controlling your restaurant costs. Get some quick tips to help you keep track of stock and make forecasts using restaurant inventory management software.
What is restaurant inventory management?
Restaurant inventory management is the process of tracking and managing the sale, ordering, storage, and movement of stock to demonstrate how much you have of each item and enable you to replenish those items promptly to meet demand.
Inventory management is a restaurant costing strategy that influences your restaurant food costs, revenue, profitability, and cash flow.
Having too much cash tied up in inventory can lead to negative cash flow and food waste if ingredients aren’t used before their expiration date. But having too little inventory makes it difficult to meet customer demand.
In short, restaurant food inventory tracking is both a loss prevention tool and a measure of profitability for your restaurant.
Common restaurant inventory terms
Restaurant inventory management is an all-encompassing process that goes beyond counting stock. This means you should familiarize yourself with several terms specific to the practice.
A critical metric that helps you understand and control costs. COGS is the cost of the ingredients used to create menu items. It tells you how much you spend on food and includes all your food waste. Calculate it using the following formula:
Beginning inventory + Purchased inventory - Ending inventory = Cost of goods sold
To determine COGS as a percentage of sales, divide your COGS numbers for a period of time by the sales for the same time period, and multiply by 100:
(Cost of goods sold / Total sales) x 100 = COGS sales percentage
The minimum amount of restaurant inventory to have on hand to meet customer demand. It includes a small buffer to account for unexpected inventory fluctuations, like demand increases and restaurant food waste.
Units of measurement (UOM)
How a quantity of inventory is measured, e.g., ounces, pounds, bags, kilograms, etc. It doesn’t matter what UOM you use; just be consistent. Managers and chefs will need to make unit conversions because the purchase UOM, or the UOM displayed on supplier invoices, and usage UOM, or UOM used for a particular recipe or dish, differ.
The process of converting one UOM to another to ensure accurate recipes and costs. For example, if you purchase beef by the pound for $2.75 but serve it by the ounce, you’ll need to calculate the cost per ounce. Because there are 16 ounces in a pound, your serving unit cost is $0.17.
The type, quantity, and volume of ingredients needed to make a dish. Your recipes dictate the variety of ingredients to have in stock. Recipe costing is a critical tool for modern restaurant operations to gain precise insights into the profitability of their recipes and menu items.
An inventory control tool, often a restaurant inventory spreadsheet, that’s used to help count inventory. It typically includes columns for item descriptions (e.g., a restaurant food inventory list), universal product codes (UPCs), suppliers, UOM, costs, and quantities.
A method of taking inventory. You count what’s on the shelf and in storage and match it against your inventory management system. Count sheets should be organized to reflect the walk-in and pantry to streamline the act of taking inventory without having to run around the kitchen to find an item.
End-to-end inventory management
The all-encompassing nature of restaurant inventory management. It includes everything from order management and storage to counting and updating inventory price data from invoices.
Sitting (or on-hand) inventory
The amount of stock currently available in the kitchen. You can refer to it by its dollar value or physical amount.
How much inventory you’ve used for a certain period, whether it’s a month, week, or year. You can get this information by checking your POS system, such as Toast, or choosing a restaurant inventory management software solution that integrates directly with it.
By doing this, you can easily monitor your food costs and COGS and view Product Mix Management (PMIX) reports. Your PMIX Report shows the variance between planned and actual margins of menu items based on depletion, sales, and discounts.
How much restaurant inventory you plan to use during a specific period, calculated by dividing the value of your sitting inventory by the rate of its average depletion. For example, if you have 70 pounds of chicken wings on hand and estimate you’ll use 10 per day, you have seven days worth of usage.
Actual vs. theoretical inventory
Theoretical inventory levels are the inventory levels based on how much you should’ve consumed or sold. Actual inventory levels are the true inventory levels after food waste, theft, spillage, and miscalculated portions have been factored in.
The difference between actual and theoretical inventory, expressed as a dollar value, percentage, or physical quantity. For example, if your inventory is down $200, but your records say you only sold $190 worth of product, your variance is -$10 worth of unaccounted stock.
Expressed as a percentage, you take the variance amount ($10) and divide it by the inventory record amount of $200, bringing your variance to 5%. The variance is recorded in variance reports and may indicate data input errors, theft, or food waste.
Shrinkage is one of the main reasons for differences in recorded and actual inventory. It’s an all-encompassing word for stock loss due to theft, liquor spillage, breakage, food waste, and miscalculated portions.
The amount of usable product after cleaning and trimming. Yield is commonly expressed as a percentage.
Now that you have a basic understanding of the most common restaurant inventory terms, let’s explore why inventory management is so important.
Your guide for how to do bar inventory. An organized step-by-step guide that provides insights into how to best measure liquor inventory.
Why restaurant inventory management matters
Proper inventory management is crucial for restaurant success. It can make or break your food costs and is an essential food cost control method. If you don't know what you're losing, you don't know what you could be earning.
Inventory tracking means knowing exactly:
What supplies come into your restaurant
What goes out of your kitchen
What's leftover in the back of the house
What was wasted along the way
Without knowing these exact numbers, you won't be able to understand where your supply (and money) is going.
Accidents happen, so some food waste is inevitable. But you have to track, record, and account for these accidents to ensure your variance figures are correct and costs are accurate so that you’re not losing money.
That’s why yield is so important — you need to determine those actual unit costs when calculating plate costs so you know exactly how much each portion of food is worth, and therefore how much money is thrown away when it’s wasted.
Inventory management also helps you maintain positive cash flow by ensuring you don’t have too much money tied up in stock or, worse, slow-moving stock that you simply can’t get rid of.
Your ability to meet customer demand, revenue targets, and profit goals are hugely influenced by how well you manage inventory. If you’re maintaining the right stock levels, you can always fill most orders and can reduce the number of times you disappoint a customer by telling them what they ordered has been 86’d.
Restaurant inventory management is also crucial for COGS calculations. It ensures beginning, ending, and purchased inventory numbers are accurate. From there, you can make well-informed decisions about how to reduce costs and boost profits.
Of course, getting accurate numbers is the tricky and time-consuming part. That’s why so many operators choose to ignore their COGS calculations altogether or, at best, guesstimate.
Manual restaurant inventory management
Some operators take restaurant inventory the old way. They use printouts and write down the numbers of every single item, including UOMs. Then, they transfer that information into an Excel spreadsheet or an outdated legacy system that hosts inventory count sheets.
The process up to this point is already cumbersome — and it just gets worse.
Managers, chefs, or other assigned employees will then check for consistency of UOMs and refer to invoices for relevant costs. If different suppliers have different UOMs, conversions must be made.
The manual way of taking inventory clearly takes up a lot of time and is prone to human error. Imagine what you and your employees could do with all that extra time! You could chat with guests to gather feedback, refine your digital marketing approach, create new menu items…the possibilities are endless.
You may argue that manually taking inventory is necessary to track theft and manage COGS. But, if you carefully think about it, you’ll realize it’s not needed.
Theft can be tracked by installing inexpensive cameras instead of inaccurate manual inventory management processes. Manual inventory management jeopardizes the accuracy of COGS figures, anyway! It’s highly prone to error, especially at the end of a long day, and does not factor in ingredient price fluctuations, which often occur daily.
With inaccurate COGS data, you can’t manage your COGS properly. The business decisions you make will be based on the wrong data, and you’ll never have an accurate picture of exactly how profitable your restaurant is. A better way to take restaurant inventory is a necessity.
Inventory Management Software
Technology can eliminate a lot of the manual input, errors, and paper-pushing by digitizing paper invoices and automatically pulling invoice data into cloud-based restaurant management software.
This means you can see what your on-hand inventory levels are in real time, based on your latest supplier prices. Your COGS numbers will be more accurate, so you’ll make better decisions. And because the human element is removed, you can feel confident that there are no errors.
Some software even automatically applies General Ledger (GL) codes. These codes are part of your restaurant accounting best practices and are vital if you want to improve efficiency and reduce food costs.
Simply put, business owners create these codes to help categorize transactions and make them easily searchable in the restaurant Chart of Accounts, a record of all the financial transactions your restaurant has ever made. They keep your ledger tidy and audit-ready.
Furthermore, the software can also simplify your entire inventory management process by:
- Prompting inventory counts. Just set the frequency, time of day, and assign a staff member to take inventory.
- Letting you manage inventory via mobile apps, even if you have no Wi-Fi deep inside the walk-in. Simply sync up to the Wi-Fi when you have internet access again, and counts will update automatically.
- Making it easy to build count sheets by creating a product catalog from digitized invoices. Historical prices update automatically, so you don’t have to dig through old invoices to find previous pricing, and you can drag and drop new products into existing count sheets when needed.
- Ensuring your inventory levels are up to par. Simply select your par levels when using the system for the first time. Then, after you’ve taken inventory, watch how the software automatically generates order guides based on what you have available and what you need to maintain par. It’s that simple.
Of course, not all software is created equal — and often, restaurant operators find they need to invest in multiple platforms for better inventory management: one for inventory automation and another for managing inventory.
You end up flipping between platforms and having to revert back to manual data entry and double-checking figures. Software that was supposed to make your life easier is now doing the exact opposite.
Inventory management best practices
These best practices can help simplify restaurant inventory management through standardized processes, ensuring that business decisions are based on accurate data to help you run a more profitable business.
Take inventory often
Frequent inventory counts help you track how much stock you have so you don’t over- or under-order, maintain your par inventory levels, and better understand your COGS.
Organize your space
Organization is key to getting started with inventory tracking and management. Labels are crucial here — all food in containers should be dated and labeled, no matter what. And organizing the walk-in and dry storage so that different types of food have their own designated areas sets you up for success.
This ensures that you’re using your space efficiently, storing ingredients properly, and able to identify what you need when you need it.
Additionally, as you’re getting started each day, you can easily get rid of any expired foods or items that are no longer usable for your menu.
Maintain a consistent count schedule
Whether it’s daily, weekly, or monthly, sticking to the same interval between counts helps you build the habit of taking inventory, makes COGS calculations more manageable, and improves decision-making.
You’ll get data for a set period that you can compare against the same period, and you can better identify trends and make decisions based on these trends. For example, if your usage is higher from one month to the next, it may indicate you’re making more sales than you projected.
Improve inventory management processes
Get your kitchen staff to check incoming orders from suppliers against the invoices to ensure they’re correct in terms of weight, quantity, and cost. They should note down any discrepancies so that you get vendor credits.
Train your staff (yes, ALL of them)
Inventory management cannot fall entirely on one person. Managers and shift leaders should be delivering detailed inventory reports whenever they clock out and alerting the team of any major outages or issues.
This responsibility also falls on your line cooks and back-of-house staff who should be making notes of spillage, errors, and rotten food throughout their shifts. Training your staff to become inventory experts or dedicated mathematicians might be a tall order. But it's easier if you incorporate an easy-to-use inventory system for your employees.
Use the First In, First Out (FIFO) method
Chefs should make sure the oldest inventory or ingredients are used before fresher items to reduce spoilage. This simple act can drastically cut back on food waste.
Track your food waste
As previously noted, inventory can deplete for various reasons: sales, theft, spillage, incorrect portions, and food waste. To make sure your actual inventory levels and COGS figures are correct, account for all food waste. This can be as simple as a document with notes for food waste occasions so you can calculate the loss for the next inventory period.
Implementing these best practices into your restaurant’s method of inventory management is simplified by introducing the right restaurant inventory management software.
Track your daily sales reports
Sales directly dictate inventory, of course. So it’s important to keep a daily handle on sales specifically for inventory purposes.
Even if you can afford only a daily five-minute review of your metrics (though these check-ins should amount to a bigger, weekly deep dive), the best practice is to track restaurant sales every day.
When you check sales daily instead of weekly, bi-weekly, or monthly, you'll be able to track and respond to minute-by-minute changes in your restaurant, allowing you to make timely adjustments to your restaurant's inventory planning and your provision deliveries.
Accommodate seasonal items
Keep in mind what's seasonal in your restaurant and plan ahead accordingly.
For example, if your peppermint hot chocolate doesn’t tend to move post-holidays, your inventory tracking will tell you how long to leave it on the menu. You should be able to easily see when it's losing luster for your customers day-by-day, and you’ll avoid taking it off your menu too soon or too late.
Invest in restaurant inventory management software
Proper inventory management helps keep food costs down and can track your profitability. But many operators still struggle with it because they use complicated, outdated methods that require lots of manual input, take too much time, and lead to too many errors.
That’s why Toast and xtraCHEF by Toast combine to offer an automated inventory management solution that’s based on a strong data foundation.
xtraCHEF combines invoice processing automation and inventory management in a single platform, so you spend less time flipping between platforms and more time running your restaurant and growing your business.
Here are a few key capabilities:
Automatically curated product catalog can make it easier to create count sheets and keep your inventory values accurate. Product grouping capabilities can help you stay organized by keeping products of the same type together if you use multiple vendors for the same ingredient, allowing you to see who has the best price at any given moment.
Integrated par level ordering can help maintain par inventory levels by automatically generating order guides based on what you have and need to maintain these levels.
An intuitive interface enables you to configure count sheets exactly the way they appear in the kitchen and quickly add or subtract products from your inventory, making inventory management simple for all users. And our mobile inventory management capabilities include autosave features that sync the counts taken into the platform when you reconnect to the internet after a deep dive into the walk-in or freezer.
How often do restaurants do inventory?
This depends on how often you have deliveries in your restaurant. Most restaurants do inventory check-ins 1 - 2 times per week, but it makes sense to take count of your inventory every time you’re restocking, to make sure that everything is fresh and within its expiration dates.
How is food cost calculated?
Food cost percentage is calculated by taking the cost of goods sold and dividing that by the revenue or sales generated from that finished dish. Learn more about calculating food cost percentages here.
How much food inventory should a restaurant carry?
You only need to have enough inventory to cover your sales, plus a little bit extra in case of an emergency. For most restaurants, this usually means about 5 - 7 days worth of inventory, if you’re getting 1 - 2 deliveries per week.
What is a good inventory to sales ratio?
A good inventory to sales ratio is between 4 and 8, which means selling your entire food inventory between four and eight times each month.
What is the average inventory turnover ratio for restaurant food?
The inventory turnover ratio indicates the number of times the store sold out its inventory in a given time period. A low inventory turnover ratio indicates either low sales or too much inventory in stock, while a high inventory turnover ratio indicates either strong sales or a poor inventory purchasing plan. The restaurant industry average is about five.